Carothers v. Rice, 78-3366

Citation633 F.2d 7
Decision Date23 October 1980
Docket NumberNo. 78-3366,78-3366
PartiesBlue Sky L. Rep. P 71,586, Fed. Sec. L. Rep. P 97,632 Joseph A. CAROTHERS et al., Plaintiffs-Appellees, v. W. Thomas RICE et al., Defendants-Appellants.
CourtUnited States Courts of Appeals. United States Court of Appeals (6th Circuit)

Franklin R. Nix, Oscar N. Persons, Alston, Miller & Gaines, F. Dean Copeland, Jeffrey P. Adams, Atlanta, Ga., Joseph E. Stopher and Edward H. Stopher, Boehl, Stopher, Graves & Deindoerfer, Louisville, Ky., for defendants-appellants.

John L. Carroll, Johnson, Carroll & Griffith, Professional Corp., Evansville, Ind., Lawrence L. Pedley, William T. Warner, Robert P. Ross, Wood, Goldberg, Pedley & Stansbury, Louisville, Ky., for plaintiffs-appellees.

Before BROWN, KENNEDY and JONES, Circuit Judges.

CORNELIA G. KENNEDY, Circuit Judge.

We permitted an interlocutory appeal in this case to decide what statute of limitations should be applied to a claim under § 10(b) of the Securities and Exchange Act of 1934 (1934 Act) (15 U.S.C. § 78j(b)) and rule 10b-5 of the Securities and Exchange Commission filed in Kentucky. Appellees filed their complaint in the United States District Court for the Western District of Kentucky alleging that they were fraudulently induced to sell their stock in Cybernetics Systems, Inc. by appellants' misrepresentations and omissions in a tender offer in violation of § 10(b) and rule 10b-5 and the laws of Kentucky, Delaware, and Virginia. They prayed for damages or, alternatively, rescission. Appellants moved to dismiss on the ground that the action was time-barred by the three year statute of limitations in Kentucky's Blue Sky Law, Ky.Rev.Stat.Ann. § 292.480(3). The District Court denied the motion, holding that the action was timely under Kentucky's five year statute of limitations for claims based on fraud, Ky.Rev.Stat.Ann. § 413.120(12). He certified the choice of the five year statute under 28 U.S.C. § 1292(b) as a controlling question of law as to which there is substantial ground for difference of opinion.

There is no federal statute of limitations for § 10(b) and rule 10b-5 actions. The private cause of action against one who violates their terms was not expressly granted. Rather, after numerous district courts and courts of appeals found an implied private cause of action, the United States Supreme Court confirmed that such a cause of action did exist. In the absence of a federal statute of limitations, this Court must look to the statutes of the forum state, Kentucky, and apply that which best effectuates the purposes of the federal securities laws. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 210 n.29, 96 S.Ct. 1375, 1389 n.29, 47 L.Ed.2d 668 (1976); Gaudin v. KDI Corp., 576 F.2d 708, 711 (6th Cir. 1978); Charney v. Thomas, 372 F.2d 97, 100 (6th Cir. 1967).

Appellants argue the blue sky law should apply as defrauded sellers have an implied remedy therein; the criminal liability section, Ky.Rev.Stat.Ann. § 292.320(1), is virtually identical with rule 10b-5; the blue sky law has the same purpose as the federal securities laws; Kentucky has held that its blue sky law contains the sole appropriate limitation period for a federal claim by a purchaser of securities, induced by a misrepresentation, against the seller; and shorter, not longer, statutes of limitations better effectuate the purpose behind the federal securities laws. Appellees argue that the common law fraud action is closer to a 10b-5 claim than a claim under Kentucky's Blue Sky Law as defrauded sellers do not have a remedy under the blue sky law; both 10b-5 and fraud actions require scienter while the blue sky law claim does not; both 10b-5 and fraud actions require the plaintiff to have relied upon the misrepresentation while the blue sky law does not; both 10b-5 and fraud actions allow rescission or damages but the blue sky law only allows damages if the plaintiff no longer possesses the securities; and longer, not shorter, statutes of limitations better effectuate the purposes behind the federal securities laws.

I.

Section 413.120(12) provides that an "action for relief or damages on the ground of fraud or mistake" shall be commenced within five years after the cause of action accrued.

Section 292.320(1) provides:

(1) It is unlawful for any person, in connection with the offer, sale or purchase of any security, directly or indirectly:

(a) To employ any device, scheme, or artifice to defraud;

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading; or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.

An express civil remedy is provided in § 292.480(1):

(1) Any person, who offers or sells a security in violation of this chapter or of any rules and regulations promulgated hereunder or offers or sells a security by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made in the light of the circumstances under which they are made not misleading (the buyer not knowing of the untruth or omission) and who does not sustain the burden of proof that he did not know and in the exercise of reasonable care could not have known of the untruth or omission is liable to the person buying the security from him, who may sue either at law or in equity to recover the consideration paid for the security, together with interest at six percent per annum from the date of payment costs and reasonable attorneys' fees, less the amount of any income received on the security, upon the tender of the security, or for damages if he no longer owns the security. Damages are the amount that would be recoverable upon a tender less (a) the value of the security when the buyer is disposed of it and (b) interest at six percent per annum from the date of disposition.

This remedy is limited by a three year statute of limitations provided in § 292.480(3).

Kentucky's Blue Sky Law only expressly provides a civil remedy for defrauded purchasers; it provides a civil remedy for defrauded sellers like the appellees only if such a remedy can be implied. If no remedy can be implied, it would be improper to apply the statute of limitations from the blue sky law.

Since the standard for determining the applicable statute of limitations is to select the statute that best effectuates the federal policy involved, it is appropriate to look to the local statute which bears the closest resemblance to the federal statute involved.

Vanderboom v. Sexton, 422 F.2d 1233, 1237-38 (8th Cir.), cert. denied, 400 U.S. 852, 91 S.Ct. 47, 27 L.Ed.2d 90 (1970). If a plaintiff could bring his federal securities claim under state common law, but could not bring any such claim under state blue sky law, the state blue sky law could hardly be said to bear the closest resemblance to the federal statute.

Kentucky's Blue Sky Law is largely drawn from the Uniform Securities Act (U.S.A.). Appellants argue a cause of action for defrauded sellers can be implied both from the language adopted and from the language not adopted from that Act.

Section 292.320(1) is almost an exact copy of U.S.A. § 101, which provides:

It is unlawful for any person, in connection with the offer, sale, or purchase of any security, directly or indirectly

(1) to employ any device, scheme, or artifice to defraud,

(2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or

(3) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.

The comments to § 101 explain that § 101 is taken substantially from rule 10b-5, which was modeled after § 17(a) of the Securities Act of 1933 (1933 Act). 1 Implied remedies under rule 10b-5 have been extended only to defrauded purchasers and defrauded sellers. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975); Gaudin v. KDI Corp., supra, 576 F.2d at 711.

U.S.A. provides expressly for civil liability for defrauded purchasers in § 410, which is similar to § 292.480(1) except that the Kentucky legislature did not adopt § 410(h) of U.S.A. It is section 410(h) which provides that the statutory remedies shall be in addition to the remedies provided at common law and that no remedies shall be implied under the statute except as are expressly provided for in § 410. 2 The comments to § 410 clearly proscribe any implication of a remedy for defrauded sellers even though private causes of action have been implied under rule 10b-5 for defrauded sellers as well as for defrauded purchasers. U.S.A., in §§ 414(a) and 414(b), applies § 410 to any person who sells or offers to sell, but does not apply § 410 to any person who buys or offers to buy.

The Kentucky legislature did not enact § 410(h) of U.S.A., nor did it enact §§ 414(a) and 414(b). The failure to enact these sections indicates that the Kentucky legislature, unlike the drafters of U.S.A., did not intend to preclude implied remedies under the Kentucky Blue Sky Law similar to implied remedies under rule 10b-5. Compare LaRosa Building Corp. v. Equitable Life Assurance Society of United States, 542 F.2d 990, 993 (7th Cir. 1976) (court concluded defrauded sellers had a remedy under Illinois Blue Sky Law as legislature originally had enacted subsection (h) precluding implied remedies but then repealed it).

Further, Kentucky intended its blue sky law to be coordinated with federal securities acts. Section 292.530 provides that the blue sky law "shall be so construed as to effectuate its general purpose to make uniform the law of...

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